AlphaMetrix woes could cost fund managers

The decline of AlphaMetrix Group LLC could mean as much as $10 million in losses for fund managers who worked with the Chicago-based company, according to a federal court monitor.

The monitor said in an updated report filed Dec. 2 that hedge fund managers, also known as commodity trading advisers, are owed $7 million to $10 million in fees by AlphaMetrix while their investor clients are owed $3 million in rebates.

The monitor was appointed after the Commodity Futures Trading Commission brought civil charges against AlphaMetrix in federal court in Chicago last month, saying the company's commodity pool operator last year misappropriated at least $2.8 million and “issued false or misleading account statements to these pool participants that concealed its fraud.”

The financial distress at AlphaMetrix emerged less than a year after futures industry self-regulatory organizations, the National Futures Association and CME Group Inc., hired a unit of AlphaMetrix to help develop a technology system that would improve their oversight of futures brokers' accounts after the collapses of MF Global Inc. and Peregrine Financial Group Inc.

Beyond that relationship, the NFA had regulatory authority over the AlphaMetrix commodity pool operator. The NFA took action against AlphaMetrix in October after the shortfall came to light, ordering the company to repay pool participants by Nov. 1. Instead, AlphaMetrix announced the fund liquidation on Oct. 30.

The company, which had $700 million in assets under management as of August and was led by CEO and majority owner Aleks Kins, began liquidating its investment funds in October after a company shortfall in assets was revealed.

MONITOR WANTS 'ADDITIONAL INVESTIGATION'

The court-appointed monitor “believes that additional investigation into the activities of current and former management should be conducted to determine whether there are causes of action to be pursued to bring in additional funds to compensate the losses of the rebate claims and possibly the claims of the CTAs,” Barnes & Thornburg Chicago attorney Deborah Thorne said in her report.

She expects that 95 percent of investor funds, excluding the rebates, should be returned by Dec. 20. She noted that AlphaMetrix “spent most or all” of the up to $13 million before her appointment, with software development activities being a “substantial financial drain.”

The commodity pool operator had withdrawn fees owed to the fund managers from investor accounts, but it didn't transfer all of that money to the managers and instead shifted it to its parent company. As investors fled AlphaMetrix after the shortfall was discovered, the firm's assets under management shrank to $463 million by last month.

"If you were a CTA, basically you were financing the operation of AlphaMetrix and you're not going to be happy about that," said David Matteson, an attorney with Drinker Biddle & Reath in Chicago who has in the past worked for some of the injured CTAs, but is not involved in the case.

A major AlphaMetrix creditor, San Francisco-based White Oak Global Advisors LLC, is planning to foreclose on AlphaMetrix assets against which it has a lien and has scheduled a Dec. 30 sale of assets at the offices of law firm Chapman & Cutler, the report said. White Oak Managing Director Barbara McKee declined to comment on the sale. Attorneys at Chapman & Cutler didn't return calls seeking comment.

'LIKE ANYONE ELSE, HE'S DISAPPOINTED'

The investor rebates are owed to about 45 investors, with one investor, William Crabel, owed the “majority of the outstanding rebate amount,” the report said. Mr. Crabel, who is known as "Toby," has arranged a payment plan with the monitor to recoup funds owed him, reportedly about $2.3 million.

"Like anyone else, he's disappointed," said Cynthia Aragon, who is general counsel for Los Angeles-based Crabel Capital Mangement LLC. "He's been in industry for 20-plus years. CTAs are a small group and get to know everyone and rely on peoples' trust. When that trust is broken, it's disappointing and frustrating."

Ms. Thorne said in a preliminary report last month that the AlphaMetrix family of units has been "insolvent since perhaps 2010."

In addition to the technology arm that was providing services to the regulators and the commodity pool operator, the company also ran a conference business that hosted lavish "summit" trips to Florida and Monaco as well as cocktail parties at European locations designed to introduce investors and commodity hedge fund managers.

AlphaMetrix recently granted a three-year license to host the summits to Context Summit LLC in exchange for $300,000, the monitor report said. Two of three Context managing partners are former AlphaMetrix employees who shifted to Bala Cynwyd, Pa.-based Context last month, including Geoff Marcus, who the monitor said had a 25 percent ownership of the AlphaMetrix conference business. They are making plans to host the Florida conference next month.